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Earnings Preview: Reynolds American 2Q

Michael Felberbaum, AP Tobacco Writer

RICHMOND, Va. (AP) -- Reynolds American Inc., the second-biggest U.S. cigarette company, should give investors some insight into its premium Camel brand and its lower-priced Pall Mall brand when it releases its second-quarter results before the stock markets open Wednesday.

WHAT TO WATCH FOR: Americans are buying fewer cigarettes as they face rising taxes and greater smoking bans, health concerns and social stigma, prompting most tobacco companies to raise prices and cut costs to bolster profits. The decline in cigarette volumes industrywide also has led to heavy promotional activity by the nation's largest tobacco companies.

Winston-Salem, N.C.-based Reynolds American said the number of cigarettes sold by its R.J. Reynolds Tobacco subsidiary fell by about 9 percent during the first quarter to 14.9 billion cigarettes, compared with its estimate of a total industry decline of 6 percent. It sold 5.5 percent less of its Camel brand and Pall Mall volumes fell 2 percent. The brands account for more than 60 percent of Reynolds American's total cigarette volume.

Camel's market share increased by one-tenth of 1 percentage point to 8.5 percent of the U.S. market, while Pall Mall's market share grew 0.5 percentage points to 9 percent.

The company has promoted Pall Mall as a longer-lasting and more affordable cigarette for smokers who are weathering the weak economy and high unemployment. The company has said that half of the people who try the brand continue using it.

The number of Natural American Spirit cigarettes its Santa Fe Natural Tobacco subsidiary sold grew nearly 15 percent to about 700 million cigarettes.

Analysts also pay close attention to the company's smokeless tobacco products — a segment of the tobacco industry that's growing and becoming increasingly competitive as companies fight the decline in cigarette sales. Volume for its Kodiak and Grizzly smokeless tobacco brands rose about 1 percent during the first quarter compared with a year ago. The brands had a 33 percent share of the U.S. retail market, which is tiny compared with cigarettes.

Reynolds American also is launching a revamped version of its Vuse-brand electronic cigarette in Colorado this month, with its sights set on expanding nationally.

The company also is moving ahead with its nicotine gum under the Zonnic brand, which is meant to help people stop smoking. In 2009, Reynolds bought the Swedish company Niconovum AB, which makes nicotine gum, pouches and spray products.

WHY IT MATTERS: Continued strength from Pall Mall could mean smokers are still switching to cheaper brands to save money, and those who tried the brand during the recession are remaining loyal. But if volumes of premium brands like Camel are rebounding, that could signal consumers are adjusting to higher prices on cigarettes following federal and state tax hikes. Progress on cigarette alternatives could illustrate a greater interest in smokers looking to quit or find other products to use in places they cannot smoke.

WHAT'S EXPECTED: Analysts, on average, expect Reynolds American to report earnings of 83 cents per share on revenue of $2.19 billion, according to FactSet.

LAST YEAR'S QUARTER: Reynolds American reported adjusted earnings of 79 cents per share and revenue of $2.18 billion. Figures for both periods exclude excise taxes the company passes through to the government.


Michael Felberbaum can be reached at https://www.twitter.com/MLFelberbaum.